It has been a roller-coaster couple of years for shareholders in Rolls-Royce (LSE: RR). As the pandemic hurt demand for air travel, the engine maker’s finances were pummelled. Some investors saw a buying opportunity in battered Rolls-Royce shares.
Here I look at how much I would have made if I had spent £1,000 on Rolls-Royce shares a year ago – and consider what I will do now.
20% return
Investing £1,000 into Rolls-Royce a year ago would have turned out to be a lucrative move for me. In the past 12 months, the shares have moved up by 20%. So I would have made a paper gain of £200 on my stake so far. If I owned the shares today, I could lock in that gain simply by selling them. The company has not paid a dividend in the past year – and does not plan one for 2022, either – so that £200 increase in share price value would be my total return.
Still, even without any dividends, I would be happy with a 20% return in one year. But a year ago there was no way to know what would happen next to the Rolls-Royce share price. There were large risks, such as uncertain timings for civil aviation recovery. There was also the risk of a further liquidity crunch leading to a rights issue diluting existing shareholders. Rolls-Royce has since returned to positive free cash flow, which in my view reduces the risk of a liquidity crunch for now at least. But the timing and scale of future demand recovery in civil aviation remains uncertain. That is a risk to revenues and profits at Rolls-Royce.
Why have Rolls-Royce shares increased in price?
In the past year, the FTSE 100 index of leading UK shares has moved up by 15%. Against that backdrop of a strong market generally, the Rolls-Royce increase looks a bit less impressive.
Still, a 20% increase in a share I owned would have been welcome. What drove this improvement? I think it reflects a shift in sentiment about Rolls-Royce. A year ago, investors were hoping for better times ahead but the company was still facing a tough immediate operating environment. Move forward a year and the engineer has far more attractive cashflows, demand has improved and the benefits of a cost-cutting programme are starting to be seen in its business results.
My next move
Will the Rolls-Royce share price increase 20% in the next year? Nobody knows – that is the nature of the stock market.
I do see reasons for optimism that there could be further upside for the shares. Civil aviation demand will hopefully see further recovery, boosting profitability in a key division of the company. More benefits of the cost-cutting programme will likely show up in the company’s performance. If it sustains free cash flow, investor confidence will improve in the firm’s long-term business model.
However, risks remain, including the possibility of further challenges to demand in civil aviation, something that airline Ryanair recently warned on. For now, I have no plans to add Rolls-Royce to my portfolio.
